The United States is a global source of gray-market vehicles

When U.S. Secret Service agents showed up at Jaguar Land Rover Cincinnati, a customer wearing a T-shirt and shorts who claimed to be a wealthy energy broker was about to buy a Range Rover with a cashier's check for $93,005.

The agents watched the deal close, then followed the buyer to his home. There, they learned he was unemployed and lived with his mother, court documents show.

The man was buying the Range Rover for a company called Automotive Consultants of Hollywood. He was to leave it at a storage yard a few days later in exchange for $500. Had the agents not seized the SUV, they say, it was destined for a buyer in China who didn't want to pay the marked-up prices at Land Rover dealerships there.

Authorities, who say these types of transactions happen frequently, began working last year to stop the increasing flow of high-end cars overseas. But they've run into a significant obstacle: What the exporters are doing may not be illegal -- even if the government and the automakers don't like it, and even if so-called straw buyers are sometimes deceptive.

Most automakers prohibit sales to exporters and have charged dealers who violate the bans more than $30 million in recent years, according to court testimony.

"What they're complaining about is competition," said Ely Goldin, a Pennsylvania lawyer representing several exporters that have had property seized. "Why should somebody who goes into a dealership and pays top dollar for a car be legally prohibited from selling the car to whoever they want to sell it to?"

The Secret Service, customs agents and authorities in at least 11 states have been cracking down on export operations but with relatively little to show for their efforts.

They experienced a big setback in April, when a federal judge in Ohio ordered the government to return the Range Rover, a $64,000 Porsche Cayenne and $1.2 million in cash it had taken from Automotive Consultants of Hollywood. The judge, Sandra Beckwith, said prosecutors failed to provide enough evidence that the company had broken any laws. Because the vehicles were fully paid for, Beckwith also was skeptical that the dealerships, which prosecutors were portraying as victims, had suffered a loss.

A Porsche Cayenne with a hypothetical $49,600 sticker price in the United States sells for $148,594 in China. Photo by Porsche

Arbitrage opportunity

One thing is certain: Exporting cars to China can be extremely lucrative, even considering the cost of obtaining and shipping them. That's because many automakers set their Chinese sticker prices at double or triple what U.S. buyers pay. A BMW X6, for example, starts at $61,900 at U.S. dealerships but 1.06 million yuan, or $171,000, in China.

Thus, exporters say they are merely enjoying the benefits of a free market and the arbitrage opportunities that high prices and demand in China create.

"What you have is the federal government protecting foreign manufacturers' profit margins," said Josh Widlansky, a Florida lawyer representing Automotive Consultants of Hollywood, which says it locates vehicles for overseas clients but does not actually export any vehicles itself. "You have totally noncriminal conduct that the government is criminalizing because of these private contracts between the manufacturers and the dealerships."

For dealers, exporting represents a mixed bag. Sales to exporters are often easy, fast transactions at sticker price. But those who knowingly sell to exporters -- or don't do enough to screen them out, even at the risk of missing their end-of-month target -- can face severe consequences from the factory. These include monetary penalties known as chargebacks, the loss of future inventory or even termination of their franchise.

BMW, Land Rover, Mercedes-Benz and Porsche -- four of exporters' most-favored brands -- penalized their U.S. dealers with chargebacks totaling $30.4 million from 2008 through 2013, Secret Service Agent Morgan Morgan, who investigated the Ohio case, said during a March court hearing. Land Rover accounted for $5.6 million of that amount.

It seems that just about everybody who served in the Army or the Air Force in Europe in the '70s and '80s--and there were hundreds of thousands of you--imported a gray-market Porsche 911 when they ...

Big business

The automakers estimated their losses to be about five times the penalties they have levied, Morgan testified. And that may be a conservative figure.

One company, Efans Trading Corp., was involved in the export of 2,000 high-end vehicles worth more than $80 million to be exported to China in 2012. Efans expected to do 3,000 vehicles last year, Morgan said, before the government seized millions of dollars from its accounts and dozens of the vehicles.

Automakers maintain lists of known exporters and bar their dealerships from doing business with them. But beyond checking that list, many dealers say they have few ways to separate straw buyers from legitimate customers whom they don't want to turn down.

Goldin, the Pennsylvania lawyer, said he is certain that some dealers knowingly deal with exporters to boost their sales numbers, then claim they were duped if audited by the factory.

At another Cincinnati dealership, Joseph Porsche of Kings Automall, one salesman sold cars to nine out-of-state buyers recommended by one man who now appears on Porsche's list of exporters, according to court documents. All of the buyers paid with cashier's checks.

Porsche has issued $4,800 in chargebacks against the dealership, Morgan said, including $600 related to those nine cars, five of which were located later in China. The store's general manager, Bill Winstel, declined to comment.

BMW X6 SUVs are so commonly purchased for export that dealerships have been given a list of signs that may signal a straw buyer. Photo by BMW

New penalties

Automakers' policies for dealing with dealerships that sell to exporters vary. Porsche issues a chargeback beginning only with a dealership's third such sale in a given year, Morgan said.

BMW and Land Rover each sent lengthy letters to their U.S. dealers in recent months outlining more stringent penalties for selling to exporters. The BMW letter, obtained by Automotive News, says dealerships linked to exported vehicles could forfeit bonuses and future vehicle allocations if they can't demonstrate adequate due diligence. Even the first violation could be grounds for franchise termination if the circumstances are particularly egregious, BMW of North America CFO Stefan Sengewald warned.

"This practice is a serious violation of BMW center agreements," Sengewald wrote. He said authorities are investigating, among other allegations, "potential bribery or kickback schemes involving sales by BMW center personnel." "Center" is the BMW term for a dealership.

The letter also listed a series of warning signs that dealers should watch for in a potential buyer, such as traveling from far away to buy a specific model or paying in cash with no trade-in and no test drive. It says BMW could distribute fewer X5s and X6s to North America if many of them end up in China, where they are especially popular.

Spotting straw buyers

BMW has told its U.S. dealers that these red flags could indicate a customer is buying on behalf of an exporter.

• BMW X5 or X6 with 3.5-liter engine• Payment with cash or bank cashier's check• No down payment; credit card in a different name; or credit-card number provided without presenting the card• No trade-in and no test drive• Traveling a great distance because “you have the exact model I'm looking for”• Student purchasers• Same address as someone else on the exporter list• Requesting a build sheet• Getting minimal insurance• Purchases at other stores• Irritable and evasive when asked to sign a non-export agreement

New York Attorney General Eric Schneiderman has been investigating BMW, Land Rover, Mercedes and Porsche dealerships around New York City for months. A spokeswoman for Schneiderman's office said the investigation was ongoing and no charges have been filed.

One dealership group, Prestige Motors, fired or suspended about six executives in connection with the investigation in April, The New York Times reported then. A spokeswoman for the group, whose nine locations include BMW, Mercedes and Land Rover stores in New Jersey, said the company doesn't publicly discuss personnel matters but "does not condone export transactions." She said the letter BMW sent to its dealerships was not related to any known allegations against Prestige BMW.

A Tesla Model S sedan purchased for $81,070 in the United States could sell for $121,370 in China. Photo by Tesla

Few criminal cases

Most of the cases against exporters have come in the form of civil lawsuits filed by the government rather than criminal charges. The criminal cases generally have involved ancillary activities such as identity theft or tax evasion. Two men pleaded guilty in New Hampshire last year to charges of mail fraud.

Lawyers for exporters say the lack of criminal charges relative to the number of allegations authorities are making shows that the business model is fundamentally legal. Widlansky, the Florida lawyer, said exporting should be a matter between automakers and their dealers, or between dealers and customers who violate the no-export agreements that are a routine part of many luxury-car transactions. Some dealers have sued straw buyers after being penalized by a manufacturer.

At Jaguar Land Rover Cincinnati, Morgan said, the general manager, Rich Allen, was "ecstatic" to get government help in deterring exports, according to a hearing transcript. Allen told the agent his dealership receives and rejects one to three inquiries from exporter suspects per week and could sell its entire inventory in one week if it did not screen out exporters.

Morgan said the dealership has limited inventory and wants to sell to buyers who will return for service work. Allen did not respond to a request for comment from Automotive News.

Chinese prices partly reflect hefty taxes and 25 percent tariffs on imported vehicles. But a report last year from Bernstein Research found that prices on several models were an average of 37 percent higher in China even after accounting for the extra costs. When Tesla Motors began selling its Model S in China, it took the unusual step of charging the same price as in the United States, plus a $3,600 shipping charge, $17,700 in value-added tax and $19,000 in duties and other taxes.

"We know that our competitors will try to convince Chinese consumers that our relatively lower price tag means the Model S is a lesser car," Tesla wrote on its blog, "when the real reason their car costs more is that they make double the profit per car in China compared to the United States or Europe."

Automakers argue that the vehicles they sell in one market are not designed to be transported elsewhere. They say cars sold in the United States can have problems with lower-octane Chinese fuel, for example, and that servicing those vehicles under warranty costs them more money. They also say they can't reach owners in case of a recall.

Beckwith, the Ohio judge, seemed unconvinced. "These nebulous issues aside," she wrote, "it appears to the Court that the primary concern of the manufacturers is guarding their foreign market profits from competition."